First Look

First Look summarizes new working papers, case studies, and publications produced by Harvard Business School faculty.
Readers receive early knowledge of cutting-edge ideas before they enter the mainstream of business practice.
For complete details on faculty research, see our Working Papers section.

October 8, 2013

The Next Industry Headed Toward Disruption

Clayton Christensen has identified a number of industries vulnerable to disruption from low-cost competitors including health care, law, and education. You can now add consulting to the list. "The vast turnover at consultancies means armies of experienced strategists are available for hire by former clients, whose increasing sophistication allows them to allocate work instead of relying on one-stop shops as they did in the past," write Christensen and coauthors Dina Wang and Derek van Bever in the Harvard Business Review article, "Consulting on the Cusp of Disruption."

Commercializing Japanese Ballplayers

Major league baseball teams in the US have increasingly signed Japanese players, but not only because of their on-field abilities. Players such as Ichiro Suzuki and Yu Darvish bring with them intense interest and revenue possibilities from Japanese fans. In the working paper How Major League Baseball Clubs Have Commercialized Their Investment in Japanese Top Stars, Isao Okada and Stephen A. Greyser list success factors for American teams.

Too Many Men At Royal Dutch Shell?

Royal Dutch Shell was an early champion of employee diversity and inclusion, but soon-to-be-CEO Peter Voser's executive committee in 2009 was exclusively male. In a new case, Voser "must decide whether to continue to promote the firm's emphasis on global diversity and inclusion while it restructures its business and reduces its managerial workforce" in response to the economic crisis. The case, "Global Diversity and Inclusion at Royal Dutch Shell," was written by Sandra J. Sucher and Elena Corsi.

— Sean Silverthorne

Publications

August 2013

The Industrial Policy Revolution I: The Role of Government Beyond Ideology

Growth and the Quality of Foreign Direct Investment: Is All FDI Equal

By: Alfaro, Laura, and Andrew Charlton

Abstract—In this paper we distinguish different "qualities" of FDI to re-examine the relationship between FDI and growth. We use "quality" to mean the effect of a unit of FDI on economic growth. However, this is difficult to establish because it is a function of many different country and project characteristics, which are often hard to measure. Hence, we differentiate "quality FDI" in several different ways. First, we look at the possibility that the effects of FDI differ by sector. Second, we differentiate FDI based on objective qualitative industry characteristics including the average skill intensity and reliance on external capital. Third, we use a new dataset on industry-level targeting to analyze quality FDI based on the subjective preferences expressed by the receiving countries themselves. Finally, we use a two-stage least squares methodology to control for measurement error and endogeneity. Exploiting a new comprehensive industry level data set of 29 countries between 1985 and 2000, we find that the growth effects of FDI increase when we account for the quality of FDI.

Abstract—Consulting fundamental business model has not changed in more than 100 years: very smart outsiders go into organizations for a finite period of time and recommend solutions for the most difficult problems confronting their clients. But at traditional strategy-consulting firms, the share of work that is classic strategy has sharply declined over the past 30 years, from 60% or 70% to only about 20%. What accounts for this trend? Disruption is coming for management consulting, the authors say, as it has recently come for law. For many years the professional services were immune to disruption, for two reasons: opacity and agility. Clients find it very difficult to judge a firm's performance in advance, because they are usually hiring it for specialized knowledge and capability that they themselves lack. Price becomes a proxy for quality. And the top consulting (or law) firms have human capital as their primary assets; they aren't hamstrung by substantial resource allocation decisions, giving them remarkable flexibility. Now incumbent firms are seeing their competitive position eroded by technology, alternative staffing models, and other forces. Market research companies and database providers are enabling the democratization of data. The vast turnover at consultancies means armies of experienced strategists are available for hire by former clients, whose increasing sophistication allows them to allocate work instead of relying on one-stop shops as they did in the past. Drawing on the theory of disruption, the authors offer three scenarios for the future of consulting.

Sustainable Operations Management: An Enduring Stream or a Passing Fancy?

By: Drake, David, and Stefan Spinler

Abstract—Paul Kleindorfer was among the first to weigh in on and nurture the stream of Sustainable Operations Management. The thoughts laid out here are based on conversations we had with Paul relating to the drivers underlying sustainability as a management issue: population and per capita consumption growth, the limited nature of resources and sinks, and the responsibility and exposure of firms to ensuing ecological risks and costs. We then discuss how an operations management lens contributes to the issue and criteria to help the Sustainable Operations Management perspective endure. This article relates to a presentation delivered by Morris Cohen for Paul's Manufacturing and Service Operations Management Distinguished Fellows Award, given at Columbia University, June 18, 2012. We wrote this article at Paul's request.

Abstract—When Alex Ferguson took over as manager of the English football team Manchester United, the club was in dire straits: it hadn't won a league title in nearly 20 years and faced a very real threat of being relegated to a lower division. In 26 seasons under Ferguson, United won 38 domestic and international trophies-giving him nearly twice as many as any other English club manager-and became one of the valuable franchises in sports. In 2012, during Ferguson's final season before retiring, Harvard Business School professor Anita Elberse had the unique opportunity to observe Ferguson's management style in a series of visits and in-depth interviews. In this collaborative explication, she details eight parts of Ferguson's "formula" as she observed them and gives the manager his say. The lessons described range from the necessity of maintaining control over high-performing team members to the importance of observation and the inevitability of change. The approach that brought Ferguson's team such success and staying power is applicable well beyond football-to business and to life.

Abstract—For decades, large companies have been wary of corporate venturing. But as R&D organizations face pressure to rein in costs and produce results, companies are investing in promising start-ups to gain knowledge and agility. The logic of corporate venturing is compelling: a well-run fund can help a firm respond quickly to changes in markets and gain a better view of threats. In some cases, it can stimulate demand for a company's own products. And its investments may earn attractive returns. During their first three years as public companies, firms backed by corporate venture funds show better stock price performance, on average, than companies backed by traditional VCs. Managing corporate venture funds is not easy. Some companies have seen their venture initiatives fail, and even firms with successful funds have struggled to make use of the knowledge gained from start-up investments. Six steps can help companies avoid the pitfalls. Align goals. Corporate venture funds are more successful if the business of the corporate parent and of the portfolio firm overlap. Streamline approvals. A complicated decision process can burden the fund with too many goals and lead to ineffective investing patterns. Provide powerful incentives. Companies that don't offer adequate compensation to their venture capitalists will face a steady stream of defections. Tolerate failure. A zero failure rate may indicate that the fund is playing it too safe. Stick to your commitments. If a company is seen as a fickle investor, professionals will be wary of joining its venture unit, entrepreneurs will be reluctant to accept its funds, and independent VCs will be hesitant to join in. Harvest valuable information. Companies need to invest as much in learning from their start-ups as they do in making and overseeing deals.

Abstract—In health care, the days of business as usual are over. Around the world, every health care system is struggling with rising costs and uneven quality, despite the hard work of well-intentioned, well-trained clinicians. Health care leaders and policy makers have tried countless incremental fixes-attacking fraud, reducing errors, enforcing practice guidelines, making patients better "consumers," implementing electronic medical records-but none have had much impact. It's time for a fundamentally new strategy. At its core is maximizing value for patients: that is, achieving the best outcomes at the lowest cost. We must move away from a supply-driven health care system organized around what physicians do and toward a patient-centered system organized around what patients need. We must shift the focus from the volume and profitability of services provided-physician visits, hospitalizations, procedures, and tests-to the patient outcomes achieved. And we must replace today's fragmented system, in which every local provider offers a full range of services, with a system in which services for particular medical conditions are concentrated in health-delivery organizations and in the right locations to deliver high-value care. The strategy for moving to a high-value health care delivery system comprises six interdependent components: organizing around patients' medical conditions rather than physicians' medical specialties, measuring costs and outcomes for each patient, developing bundled prices for the full care cycle, integrating care across separate facilities, expanding geographic reach, and building an enabling IT platform. The transformation to value-based health care is well under way. Some organizations, such as the Cleveland Clinic and Germany's Schön Klinik, have undertaken large-scale changes involving multiple components of the value agenda. The result has been striking improvements in outcomes and efficiency, and growth in market share.

Abstract—Diverse workplaces are challenging the boundaries between workers' personal and professional lives, as workers today navigate employer pressures regarding who they are and who they can be outside of work. Lakshmi Ramarajan and Erin M. Reid consider how the attunement to power dynamics affects organisational effectiveness and organisational change.

Abstract—The article discusses the value of effective leadership and an examination of the ways in which a corporate leader should behave as of October 2013, focusing on role models in business and the behavioral traits of chief executive officers (CEOs). Diversity in business is mentioned, along with self-awareness, the acceptance of feedback, and style differences among corporate leaders.

Abstract—This paper examines how the external information environment in which foreign subsidiaries operate affects the investment decisions of multinational corporations (MNCs). We hypothesize and find that the investment decisions of foreign subsidiaries in country-industries with more transparent information environments are more responsive to local growth opportunities than are those of foreign subsidiaries in country-industries with less transparent information environments. Further, this effect is larger when (i) there are greater cross-border frictions between the parent and subsidiary and (ii) the parents are relatively more involved in their subsidiaries' investment decision-making process. Our results suggest that the external information environment helps mitigate the agency problems that arise when firms expand their operations across borders. This paper contributes to the literature by showing that the external information environment helps MNCs mitigate information frictions within the firm.

Working Papers

Abstract—We present a two-stage model of competing ad auctions. Search engines attract users via Cournot-style competition. Meanwhile, each advertiser must pay a participation cost to use each ad platform, and advertiser entry strategies are derived using symmetric Bayes-Nash equilibrium that lead to the VCG outcome of the ad auctions. Consistent with our model of participation costs, we find empirical evidence that multi-homing advertisers are larger than single-homing advertisers. We then link our model to search engine market conditions: we derive comparative statics on consumer choice parameters, presenting relationships between market share, quality, and user welfare. We also analyze the prospect of joining auctions to mitigate participation costs, and we characterize when such joins do and do not increase welfare.

Abstract—The exposure of U.S. Treasury bonds to the stock market has moved considerably over time. While it was slightly positive on average in the period 1960-2011, it was unusually high in the 1980s and negative in the 2000s, a period during which Treasury bonds enabled investors to hedge macroeconomic risks. This paper explores the effects of monetary policy parameters and macroeconomic shocks on nominal bond risks, using a New Keynesian model with habit formation and discrete regime shifts in 1979 and 1997. The increase in bond risks after 1979 is attributed primarily to a shift in monetary policy towards a more anti-inflationary stance, while the more recent decrease in bond risks after 1997 is attributed primarily to an increase in the persistence of monetary policy interacting with continued shocks to the central bank's inflation target. Endogenous responses of bond risk premia amplify these effects of monetary policy on bond risks.

Abstract—Behavioral economists argue that above-market wages elicit reciprocity, causing employees to work harder-even in the absence of repeated interactions or strategic career concerns. In a field experiment with 266 employees, we show that paying above-market wages, per se, does not have an effect on effort. However, structuring a portion of the wage as a clear and unexpected gift (by hiring at a given wage, and then offering a raise with no further conditions after the employee has accepted the contract) does lead to persistently higher effort. Consistent with the idea that the recipient's interpretation of the wage as a gift is an important factor, we find that effects are strongest for employees with the most experience and those who have worked most recently-precisely the individuals who would recognize that this is a gift.

Abstract—Platforms use search diversion in order to trade off total consumer traffic for higher revenues derived by exposing consumers to unsolicited products (e.g., advertising). We show that the entry of a platform competitor leads to higher (lower) equilibrium levels of search diversion relative to a monopoly platform when the degree of horizontal differentiation between platforms is intermediate (low). On the other hand, more intense competition between active platforms (i.e., less differentiation) leads to less search diversion. When platforms charge consumers fixed access fees, all equilibrium levels of search diversion under platform competition are equal to the monopoly level, irrespective of the nature of competition. Furthermore, platforms that charge positive (negative) access fees to consumers have weaker (stronger) incentives to divert search relative to platforms that cannot charge such fees. Finally, endogenous affiliation on both sides (consumers and advertising) leads to stronger incentives to divert search relative to the one-sided exogenous affiliation (vertical integration) benchmark, whenever the marginal advertiser derives higher profits per consumer exposure relative to the average advertiser.

Abstract—We provide a tractable stock valuation model to study the dynamics of firm-level expected returns and their valuation impact using two firm fundamentals: book-to-market ratio and ROE. Applying the model to the cross-section of firms, we find that expected returns and expected profitability are highly persistent and time-varying. Our fundamentals-implied estimates of expected returns across time horizons exhibit strong return predictability up to three years ahead and produce an aggregate equity term structure that tracks economic conditions. The implied term structure is upward sloping during normal or expansion periods but flattens or inverts during economic downturns or times of high uncertainty. Finally, we show that ignoring the dynamics of expected returns can produce large valuation errors.

Abstract—When a Major League Baseball club signs a Japanese star player, it obviously tries to commercialize its investment in the player. The initial focus is on home attendance (ticket sales) and television audiences, plus merchandise sales. These elements are similar to those considered for any high-performing players. However, for Japanese stars, there is also the potential to attract significant fandom from the local Japanese community. This represents an opportunity for truly incremental local revenue for the team. In addition, teams try to attract revenue from Japan-such as obtaining corporate sponsors, advertising signage at the home field, and visiting Japanese fans traveling to the U.S. to see these stars perform. In addition to treating team efforts at growing local Japanese community support, this paper examines seven factors for success in attracting revenues from Japanese companies and fans: pitcher or position player, player's popularity, non-stop flights from Japan, distance from Japan, non-sport tourist attractions in a city, size of Japanese community in the city, and player's and team's performance. The most important factor, however, is the player's talent and popularity in terms of performance in both Japan and the U.S. and his media exposure in Japan including endorsement contracts. In addition, if a MLB club signs a Japanese position star player and is based in a city that is endowed with a variety of non-baseball tourist attractions, this would have a further advantage for the team. The field-based research reported here is derived largely from analysis of team experiences with five principal Japanese baseball stars-Hideo Nomo, Ichiro Suzuki, Hideki Matsui, Daisuke Matsuzaka, and Kosuke Fukudome. The paper's "2013 Reflections" (pp. 15-17) includes analysis of Yu Darvish of the Texas Rangers.

Cases & Course Materials

Bhagwan Mahaveer Viklang Sahayta Samiti (BMVSS) is an Indian not-for-profit organization engaged in assisting differently-abled persons by providing them with the legendary low-cost prosthesis, the Jaipur Foot, and other mobility-assisting devices, free of cost. Known for its patient-centric culture, its focus on innovation, and for developing the $20 Stanford-Jaipur knee, BMVSS has assisted over a million people in its lifetime of 44 years. As the founder, Mr. D.R. Mehta, thinks about the financial sustainability of BMVSS, he must devise a strategy that will sustain its human impact well into the future.

In December 2012, Amir Peleg, founder and CEO of TaKaDu, reflected on how to position his young firm for the next fiscal year and beyond. The small Israeli startup had developed an innovative software system that used patented algorithms and statistical analysis to detect problems such as leaks, bursts, and faulty equipment within a water utility's infrastructure. Such problems caused significant water and energy loss at many utilities, led to service interruptions for consumers, and were only getting worse as the existing infrastructure aged. Since its founding in 2009, TaKaDu had attracted nine customers from around the world. However, as Peleg and his executive team debated how to allocate funding for the upcoming year, he needed to decide whether to focus on R&D to improve and add to TaKaDu's existing software and become the clear technology leader or move ahead with its current offering and focus on getting new customers to penetrate the market as quickly as possible before competition intensified. Some in the company called for devoting the bulk of TaKaDu's resources to making the system more easily deployable, as TaKaDu engineers were spending up to two months implementing the system per client. Peleg also wondered if the company should continue to pursue sales leads from anywhere in the world or focus on one geographic market (and if so, what region should he choose)? An Australian water utility had made a public announcement it was accepting bids to implement a smart water network monitoring system, and Peleg wanted to discuss if and how aggressively TaKaDu should bid on the contract with his management team. TaKaDu already had one Australian customer; was this the region to focus on?

Royal Dutch Shell has been among the early players to implement diversity and inclusion policies in the 1990s, first in the U.S. and then globally. In May 2009, Peter Voser, CFO and soon-to-be CEO, wants to adjust the company's business, headcount, and cost levels to adapt to changing economic conditions after one of the worst economic downturns in decades. His all-male executive committee has raised eyebrows since it is a step back from that of his predecessor, and he must decide whether to continue to promote the firm's emphasis on global diversity and inclusion while it restructures its business and reduces its managerial workforce.

Ockham Technologies' three founders are about to craft their founding agreement and split the equity among themselves. Uncertainty lingers over each member's future contributions, though-how is the team to devise a durable and effective split? Jim Triandiflou and Ken Burows worked resolutely to plan for the launch of their sales management software company. Soon they recruited a third member, Mike Meisenheimer, to lead product development. Each founder had contributed significantly to bringing the Ockham concept to life. The trio had provided the seed capital of $150,000, contracted a development team to build their product, garnered serious interest from a potential investor, and readily agreed on their roles within the company (Jim was CEO, Ken was COO, and Mike was Head of Product Management). But as Ockham entered its initial phase of product development, pressure began mounting for the team to discuss and finalize a founding agreement. What should they include in the agreement, and how should they structure their equity split?

In the midst of the financial crisis, Barclays (the world's 4th largest bank by assets) is forced by UK regulators to raise more capital. Should it take up the UK government's offer to invest or take funding from investors from the Middle East? Students may price the two deals to determine which is more expensive and must decide whether avoiding the constraints of government ownership is worth the extra cost.